There appears to be some confusion around nomination in terms of law. This has resulted in many a family feud as well as unwarranted litigation. Take, for example, a situation where a father names his eldest son nominee in all his bank accounts. Upon his death, the bank proceeds to transfer all the money in the accounts to the son. However, the other sons may argue that the money is their due. The son, on the other hand, may believe that he has a right to the money and may even claim that the father’s intention was for him to inherit all the property. Such disputes arise because of the lack of understanding between nominee and legal heir.
This difference is important not only to individuals but also to legal professionals. This is because nomination allows legal heirs to claim the property without going through the probate process and other cumbersome legal procedures.
What is nomination?
Nomination is one of those lovely options that a number of financial instruments provide for. It is available for most kinds of bank accounts, insurance policies, mutual funds, shares, and provident funds. It simply means that the account holder has nominated a person who would get the benefits on the account holder’s demise. It is essentially a convenience measure, which reduces the workload of the institution in terms of succession certificate affidavits, etc.
However, one must always remember that nomination does not decide or determine the ownership of the asset.
Who is a legal heir?
A legal heir is a person who is entitled to claim a deceased person’s property by virtue of a will or law. It is possible to nominate anyone as nominee, but it is not possible to nominate anyone as legal heir. This is because a legal heir must be entitled to claim by virtue of law, which means that there has to be a legal basis in terms of succession rules. The Hindu Succession Act, 1956 applies to Hindus and specifies the order of succession on the death of a Hindu. The Indian Succession Act, 1925 applies to Christians and Muslim Personal Law applies to Muslims. Each one of these specify who can inherit whose property on the death of the former and in what manner.
This means that the nominee and the legal heir can often be two separate people.
The difference between nominee and legal heir
Various cases have shown that merely naming a nominee does not mean that that person will end up being the sole owner of the asset. The nomination only provides him/her with the right to collect the asset from the bank or whatever the institution may be, but the right to own the asset may devolve upon the legal heir according to the succession rules.
That is not to say that the nominee cannot also be the legal heir. If a person nominates their legal heir (or the legal heir nomination is not contrary to the laws of succession), then the nominee will be both the nominee and the legal heir. In the situation where the nominee is not the legal heir, the nominee holds the money until the legal heir decides what to do with it.
Cases that deal with the issue of nomination and succession
Sarbati Devi v. Usha Devi AIR 1984 SC 646 was a case regarding nomination under the Insurance Act. The Supreme Court held that a nominee is simply a nominee and that the ownership of the policy proceeds is governed by the succession laws and does not devolve on the nominee absolutely. In Shakti Yezdani v Jayanand Jayant Salgaonkar 2023 SCC Online SC 1208, the Court dealt with nomination under the Companies Act and reiterated the same principle. It held that the Companies Act does not make any provision for nomination, unless the law specifically provides so. Therefore, any such right of nomination will be governed by succession laws.
What this essentially means is that a nominee is merely the deposit holder until the asset is transferred to the legal heir according to law.
The reason this has become a big issue is because banks and other such institutions deal directly with the nominee. Once the nominee has received the asset, it is assumed to have been transferred. However, the fact is that the nominee is simply an intermediary between the institution and the legal heir. Upon receiving the assets, the nominee becomes responsible for ensuring that the asset is transferred to the legal heir or distributed between legal heirs according to law. However, this is not the case in practice. The reason for this situation is also due to the fact that many people overlook the importance of a will.
This is also the reason why people update their nominees without taking into account the rest of their estate planning and/or will.
Problems with the nomination system
The biggest problem with the system is the fact that it fails in many cases, often leading to disputes or even complete misunderstandings. The fact that the nominee is merely supposed to facilitate the transfer of the asset to the legal heir is completely overlooked by most people, with disastrous consequences. For example, people often nominate someone (usually a son) merely due to the convenience of having a nominee, without considering or informing the rest of the legal heirs, which leads to disputes. Also, one must keep in mind that while nomination covers financial instruments such as insurance, provident funds, mutual funds, share accounts, and certain bank accounts, there are several other things that need to be taken care of such as family business, property, etc.
Nomination and estate planning
It is of paramount importance that people understand that nomination is only part of a larger system of estate planning. In addition to nomination, one must also:
• Create a will.
• Update nominees regularly.
• Create trusts if necessary.
• Appoint appropriate trustees and executors of wills.
• Consider other aspects of estate planning such as online accounts and intellectual property.
Therefore, while nomination is an important part of estate planning, it is definitely not the sole part. Proper estate planning is extremely essential if one wants to avoid family disputes and at the same time be sure that the estate goes to the rightful people.
Things to bear in mind
One needs to keep in mind the following to avoid issues:
• Draft a will.
• Update nominations as and when needed. Ensure that wills and nominations are in tandem with each other.
• Make sure to inform executors and trusted people about where documents such as wills, nomination forms, etc., are located.
• Get professional assistance when dealing with large estates, business succession, family trusts, online and intellectual property, big life changes, etc.
Thus, it is essential that the differences between legal heir and nominee are kept in mind at all times.
Nomination is a mere convenience measure and should not be relied upon solely. The right to inherit is governed by succession laws and testamentary documents. Having a sound estate planning system in place (which includes nomination, but goes beyond it) is a must if one wants to ensure that wealth is transferred in the manner they envision and without unwarranted family feud.
